Therefore the optimal capital structure strikes a balance between risk and return so as to maximize a firms stock price. Debt consists of borrowed money that is due back to the lender, commonly with interest expense. The theory of capital structure wiley online library. Jun 06, 2012 list of mba projects capital structure. The capital structure of a firm is some mix of debt. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. Capital structure, financial performance, agency cost 1. Capital structure analysis of indian oil corporation.
Capital structure in tata motors corporate finance acknowledgement the preparation of this project report was a multistaged process and each stage involved contributions from various individuals and resources. The first is to provide a theory of optimal capital structure that links risk, leverage, and value and is particularly. American journal of business education january 2011 volume 4. Capital structure, debt equity ratio, trade off theory and pecking order. Project dissertation report on capital structure analysis. More new debt holders also may mean that existing debt holders claims become. Pdf optimal capital structure and project financing.
By reconciling empirical evidence with theory practical strategies for managing capital structure in transition are suggested. Therefore, how the theory can be translated into practical financial management strategies enhancing value. The extent literature is full of theories on capital structure since the seminal work of modigliani and miller 1958. The capital structure theory and its practical implications. Capital structure analysis of indian oil corporation limited iocl a project report submitted in partial fulfillment of the requirements for the degree of master of business administration department of management studies, pondicherry university under the guidance of institutional guide. Modiglini and miller 1958 worked on the cost of capital, corporation finance and the theory of investment. Thus the higher the risk and volatility in the economy, the lower the proportion of debt in the capital structure should be. The survey would then proceed to document the answers available in the litera ture. Basheer ahmed khan department of management studies pondicherry university submitted by. Click here to submit mba projects capital structure to us. The quality of the project is known only to the entrepreneur. The predominant form of industrial organization developed capital market becomes a necessary infrastructure for fast industrialization. Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholdersp. Capital structure in the modern world springerlink.
The influence of capital structure on financial performance. American journal of business education january 2011. Reliance industries capital structure and theories of capital structure. Abor 2005 mentioned that a firm needs to finance its operations and in doing so, they will need to choose a particular combination of equity and debt which forms a capital structure. May 29, 2019 since capital structure is the amount of debt or equity or both employed by a firm to fund its operations and finance its assets, capital structure is typically expressed as a debttoequity ratio. The use of longterm fixed interest bearing debt and preference share capital. Capital structure in corporate finance is the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. Project report on capital structure financial capital. In equilibrium, it also represents the required return on a project investment.
Aswath damodaran 2 first principles n invest in projects that yield a return greater than the minimum acceptable hurdle rate. The term capital structure refers to the relationship between the various longterm forms of financing such as debenture, preference share capital and equity share capital. Pdf we examine the financing and incorporation modes for new projects. Capital structure, a reading prepared by pamela peterson drake 1. Capital structure plays a critical role which enables an organization address the dilemma of whether or not an optimal capital structure can be achieved.
Risk of cash insolvency arises due to failure to pay fixed interest liabilities. The basic idea behind the strategy is to go long one security in a companys capital structure while at the same time going short another security in the same companys capital structure. Irrelevance theorem a benchmark striking result is that under fairly general conditions. Capital structure arbitrage is a class of strategies used by market participants such as credit hedge funds and certain banks. The relationship between capital structure and profitability. Since modiglian and miller 1958, researchers devoted much effort in studying capital structure of a firm. Capital structure and financing decisions aswath damodaran stern school of business.
Introduction there have been published numerous research papers about the importance and the effect of financial structure on financial performance. Capital structure decision is the vital one since the profitability of an enterprise is directly affected by such decision. The results have shown that capital structure has an impact on companys performance, but the sign of that relation depends on the type of measure that is used to quantify the performance. Capital structure analysis of indian oil corporation limited. Define capital structure the mix of debt and equity financing used for the firms assets. Capital structure in other environments hold the ame kenya. Capital structure, cost of capital, and voluntary disclosures. It is the mix of different sources of long term funds such as equity shares, preference shares, long term debt, and retained earnings. Pwc uses an integrated capital project governance framework to perform readiness assessments on the processes and controls required for effective capital project execution. To find out if kameres 1987 opinion urvey findings on the main determinants of capital structure hold empirically. Since the interest expense on debt is tax deductible in most countries, a company can reduce its aftertax cost of capital by increasing debt relative to equity, thereby directly increasing its intrinsic value. Short term liabilities, long term liabilities, return on equity, amman stock exchange. The capital structure of a firm is some mix of debt, internally generated equity, and new equity. Many studies have provided empirical evidence that firmrelated characteristics such as profitability, tangibility, firm growth, firm size and etc.
Capital structure theory asks what is the optimal composition between debt and equity. A fundamental transformation of firm borrowing strategies is a central component of the transition from communism to market. Doc example of capital structure project coca cola fall. Analysis of automobile industry, is a bonafide work carried out by. The hurdle rate should be higher for riskier projects and reflect the financing mix used owners funds equity or borrowed money debt returns on projects should be measured based on cash flows generated and the timing of these cash flows. Project planning preparation of project report, project appraisal under normal inflationary and.
Students can find project reports,seminar topics, ppt, pdf, abstracts for free download. Pdf optimal capital structure and project financing researchgate. Capital structure policy involves a tradeoff between risk and return 1 using more debt raises the riskiness of the firms earnings stream. Risk and capital structure in asian project finance. It is the mix of debt and equity capital maintained by a firm. However, the previous studies about capital structure still focus on the relationship of firmrelated characteristics on capital structure. Project report on capital structure free download as word doc.
A summer training project report submitted in partial fulfillment of the requirement of postgraduation diploma in management session 202015 under the guidance of. More debt holders means more likelihood that the equity holders will get less or nothing, making their claim more risky. The relative proportion of various sources of funds. Capital market not concerned solely with the issue of new claims on capital, but also with dealing in existing claims. The successful selection and use of capital is one of the key elements of the firms financial strategy kajananthan, 2012. The optimal capital structure in stulz is determined by trading off the benefit of debt in preventing investment in value decreasing projects against the cost of debt. Since the interest expense on debt is tax deductible in most countries, a company can reduce its aftertax cost of capital by increasing debt relative to.
This is to certify that the project report titled capital structure. Hierarchy of claims on the firm says that debt holders get paid before equity holders. Making capital structure support strategy mckinsey. Scribd is the worlds largest social reading and publishing site. Project level capital structure in real estate much real estate finance occurs at the microlevel of individual investments in properties, projects, or deals.
Capital structure decision aswath damodaran stern school of business. The theory of capital structure milton harris and artur raviv abstract this paper surveys capital structure theories based on agency costs, asymmetric information, productinput market interactions, and corporate control considera tions but excluding taxbased theories. How does a companys capitalization structure affect its. Himanshu joshi, lecturer in corporate finance who gave us an opportunity to work on this project. Capital structure is still a puzzle among finance scholars. Capital structure, cost of capital, and voluntary disclosures jeremy bertomeu, anne beyer, and ronald dye stanford university, northwestern university october 2009 abstract this paper develops a model of external nancing that jointly determines a rms capital structure, its voluntary disclosure policy, and its cost of capital. Why much real estate investment is still done directly by individuals or small entrepreneurial. This study seeks to establish determinants of capital structure for the projects funded by international financial institutions using ifad projects as case studies. Higher risk tends to lower a stock price, but a higher expected return raises it. Financing the firms assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing. It shows the mix of a companys longterm debt, specific shortterm debt, common equity and preferred equity.
It refers to the make up of a firms capitalisation. The patterns of corporate capital structures around the world are also discussed. Capital structure is how a company funds its overall operations and growth. Chapter 17 the cost of capital in an international context. Capital structure planning free download as powerpoint presentation. And our project will examine the capital structure of coca cola company from the aspects of tradeoff theory bankruptcy cost and debt issue, pecking order theory financing priority, and agency cost debtto equity ratio and cash flow, because all of these theories are related to capital structure. Pdf capital structure choice is an important decision for a firm. This book focuses on microeconomic foundations of capital structure theory. For any business investment project, it is essential to estimate the amount of capital likely to be required for the. Feb 15, 2017 risk and capital structure in asian project finance paul m. A21 that it is important to maintain optimum levels of debt and equity in that capital structure, decision makers must constantly be in control of capital structure determinants. Capital structure an overview sciencedirect topics. The demand for capital comes mostly from agriculture, industry, trade the government. Project report on capital structure of tata motors bartleby.
Sep 07, 2014 capital structure analysis of indian oil corporation limited iocl 1. Theoretical considerations a firm could use three methods to determine its capital structure. Download latest collection of mba projects on capital structurefrom this site for free of cost. Introduction the capital structure is defined as the mix of debt and equity that the firm uses in its operation. The capital structure is how a firm finances its overall operations and growth. Aug 20, 2018 the capitalization structure of a business is its foundation. Pdf capital structure management in nepalese enterprises. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. The hurdle rate should be higher for riskier projects and reflect the financing mix used owners funds equity or borrowed money debt returns on projects should be measured based on cash flows generated.
The hurdle rate should be higher for riskier projects and reflect the. Capital structure affects a companys overall value through its impact on operating cash flows and the cost of capital. Stewart 2001 elaborated the capital structure, huang and. Sources of raising longterm finance and cost of capital. The idea of relating companys capital structure and its value started since the establishment of irrelevancy theory of capital structure by modigliani and miller in 1958.
Capital structure of a company refers to the composition or make up of its capitalization and it includes all long term capital resources i. The financing details a framework for capital structure. The problem with organizing the survey in this way is that often a. Notwithstanding the seminal modigliani and miller 23. From its first sale to the projects it invests in down the road, everything begins with the way it finances its operations.
Sources, meaning, factors affecting cost of capital. The theory and practice of corporate capital structure january 2006 2 liability strategies group executive summary this paper discusses the theory and practice of corporate capital structure, drawing on results from a recent survey. The capital structure puzzle is unravelled and a clear. A project report on effect of capital structure on profitability of the firm an empirical study submitted in partial. Capital structure determinants among construction companies in. Notwithstanding the seminal modigliani and miller 23, 241 theorem, a firms capital structure appears to be a key financial decision that is not yet completely understood. Reviewing the capital structure analysis done for disney in chapter 8, we see.
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